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High-income earners would cash in with Alliance flat tax
But average workers would get only $488 break, compared with $26,000 for the $200K crowd
By: Richard Shillington
 Judging by the news coverage of their leadership campaign we better take seriously the guys of the Reform / Alliance Party - they might stick around a while. Eventually, they might stop claiming that they're not politicians.
They perplex me, though, with their flat tax proposals because Reform / Alliance claims to support the silent majority. They portray themselves as anti-establishment and anti-elite - regular guys, not suits, to judge from the TV ads.
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How have Alliance party bosses sold ordinary working stiffs on a tax that would actually increase the workers' share of the tax burden? |
How have the Alliance party bosses sold ordinary salt-of-the-earth working stiffs on a tax proposal that actually increases the workers' share of the tax burden?
Take a closer look at the Alliance flat tax proposal, It's simple enough. Increase personal and spousal credits to $10,000, which, in turn reduces everyone's taxes (for those who pay income taxes) by $488. The proposal also replaces the three tax brackets (with marginal tax rates of 17%, 26% and 29% respectively) with one rate - 17%.
The proposed tax cut depends on your income. Under $30,000, you get a reduction of $488. From $30,000 to $60,000, the cut is $488 plus 9% of your incomes over $30,000. Over $60,000, the cut is $3,188 plus 12% of your income over $60,000.
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Ignoring health care, education, and the environment, everyone wins. Of course, some win more than others. |
Everyone pays less tax. So, at some level, ignoring health care, education, and the environment, everyone wins. Of course, some win more than others.
Lets look at the tax cut promised by this proposal. For simplicity, the following calculation is for an individual:
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Impact of the Alliance Proposed Flat Tax for an Individual on Federal Income Taxes |
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Individual Income |
Dollar Value |
Value of the Tax Cut |
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As a Percent of Previous Tax |
As a Percent of Income |
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$ 20,000 |
$ 488 |
22% |
2.4% |
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$ 30,000 |
$ 488 |
13% |
1.6% |
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$ 40,000 |
$ 1,388 |
21% |
3.5% |
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$ 60,000 |
$ 3,188 |
27% |
5.3% |
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$ 100,000 |
$ 7,988 |
34% |
8.0% |
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$ 200,000 |
$ 19,988 |
38% |
10.0% |
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$ 250,000 |
$ 25,988 |
39% |
10.4% |
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This ignores the increased RRSP room and the reduced tax on Capital Gains. |
Since the average taxpayer has an income of under $30,000, most people get the basic $488. The taxpayer at $30,000 gets the smallest tax cut judged as a percent of income (or percent tax cut).
Compare the $30,000 taxpayer's $488 tax break to the $3,188 for someone at $60,000. Double the income, but the tax break is multiplied by 6.
At the extreme high income end, $250,000, there's a tax cut of at least $26,000. I say, at least, because this analysis ignores the proposed increased RRSP limits and the reduced tax on capital gains - about half of all capital gains is earned by those 2.4% of taxpayers with incomes above $100,000.
The flat tax proposal shifts the tax burden between income classes as the following table shows.
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Distribution of the Tax Cut by Income Group |
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Income ($,000)'s |
Share of Tax Payers |
Share of Tax Cut |
Change in their Share of the Tax Burden |
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Under 10 |
5.9% |
0.0% |
0% |
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10-20 |
25.4% |
7.5% |
-17% |
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20-30 |
22.6% |
6.6% |
16% |
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30-40 |
17.2% |
9.4% |
14% |
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40-50 |
11.2% |
12.1% |
6% |
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50-60 |
7.2% |
11.6% |
2% |
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60-80 |
6.3% |
15.8% |
-3% |
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80-100 |
1.9% |
7.7% |
-8% |
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100-150 |
1.4% |
8.3% |
-11% |
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150-250 |
0.6% |
7.1% |
-14% |
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250+ |
0.4% |
13.7% |
-17% |
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Total |
100.0% |
100.0% |
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The data in this table illustrate that while the majority of taxpayers - 54% - have incomes under $30,000, they get only 14% of the tax cut. The tax cut goes disproportionately to higher income taxpayers; 13.7% going to the 0.4% with incomes over $250,000. The share of the tax burden increases significantly for those with incomes between $20,000 and $40,000. For the majority of taxpayers - 54% - their share of the tax burden increases. The burden drops significantly for those with incomes above $80,000.
By replacing the current progressive taxes with a flat tax that raises the same revenue (i.e. fiscally neutral), the taxes of rich people go down and everyone else's go up. A flat tax hurts the middle class if it is fiscally neutral. Alliance acknowledges this on their web site - kind of.
Q: Doesn't a single rate tax always hurt the middle class?
A: No! A 17% single rate will provide significant tax relief to the middle class. Middle income earners' take-home pay will increase dramatically. The arguments that a single tax would hurt the middle class have always been premised on the assumption that this new system had to be revenue neutral. Our plan dramatically reduces the tax burden for all taxpayers - including the middle class.
(Check the Alliance web-site)
So two facts about the Alliance proposal are clear - everyone gets a tax cut. The size of the tax cut is sufficient for the average tax payers to receive a tax cut even though it is proportionately less than anyone else gets and their share of the tax burden increases.
If the same tax cuts are delivered without a flat tax, the tax cut for those with incomes between $20,000 and $40,000 would be much greater. At the federal level this is just a proposal - in Alberta this is being implemented in 2001. Yikes!!
Hats off to the Alliance for getting those common-sense-driven main-street salt-of-the-earth types to volunteer for a higher share of the tax burden so that Bay street executives can get a $26,000 tax cut.
Richard Shillington, Ph.D., is a statistician who specializes in the quantitative analysis of health, social and economic policy. He appears regularly before committees of the House of Commons and the Senate, and frequently provides commentaries for television, radio and newspapers on issues of taxation, human rights and social policy. Richard's Straight Goods column appears weekly.
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